Kazmunaygaz EP posts stagnation

Oh when the state goes marching in

Boosted by ever-rising sales prices and income, state oil companies from Russia to Venezuela have become main players on markets that so far used to be by and large the domain of the world’s private-owned oil giants. The financial doldrums made in USA and spreading around the globe have brought the latter back on the scene, with state corporations being stripped of asset value and lacking enough access to capital markets to maintain their positions. For Kazakhstan’s Kazmunaygaz and its upstream branch, there seems to be no exception to the rule. While the law allows it priority rights to get control over core assets, budgets fail to do so.

by Charles van der Leeuw, KZW senior contributor

Kazmunaygaz EP posts stagnationIs Kazakhstan entering the post-oil era before its blue-chip project and first major-size offshore field development of Kashagan is taking off? While the budget for the “Caspian giant” has gone through the roof and is now in the process of being nibbled at, and Kazakhstan’s state oil and gas corporation has entered the consortium running the venture, the latter remains depending on external funding in order to succeed. Markets, however, have become a lot less predictable of late, and for the moment Kazakhstan’s main worry is not to disrupt its current outflow of 1.3 million barrels a day, while painfully aware of the financial efforts that alone takes.

On Friday last week, Kazmunaygaz Exploration and Production (KMG EP), the upstream subsidiary, listed on the London Stock Exchange, of Kazakhstan’s state oil and gas company Kazmunaygaz, presented its financial and production results over the first half of the current year. Crude oil production from the company proper and its two majority-owned subsidiaries amounted to 5.673 million tonne, coming down to just over 230,000 barrels per day. The plan for 2009 remains intact, according to the report, at 11.6 million tonne, or 234.300 barrels a day.

“In the first half of 2009 the Company produced 5,673 thousand tonnes (230.4 kbopd) of crude oil, including the Company’s stakes in both Kazgermunai and CCEL. This is 226 thousand tonnes, or 3.8% less than in the same period of 2008. The decline is partly due to KMG EP’s planned reduction in drilling and production for 2009. The oil production plan for 2009 remains unchanged at 11.6 million tonnes (234.3kbopd), including 50% stakes in Kazgermunai and CCEL.”

The report quotes Kenzhebek Ibrashev, CEO of KMG EP, as stating on the occasion of the half-year results’ presentation: “With the rebound in crude prcies the company has been able to adjust the level of investments in its core fields and aims to deliver a sustainable production level from existing assets while using its strong balance sheet to pursue our acquisition-driven growth strategy.” In other words: production boosts within the company’s scope are not on the agenda other than through new purchases of external assets – in most cases mid-size oil and gas projects the foreign operators of which have got into trouble.

Over the first half of the year, KMG EP’s gross sales revenue dropped by 39 per cent from 337 billion to just over 200 billion tenge. Expressed in US dollar, the drop comes close to 45 per cent and in euro close to 50 per cent because of a 22 per cent devaluation in early spring. Because of this and milder tax burdens, net profit dropped only from just over 147.5 billion tenge in the first half of 2008 to just below 128.7657 billion in the first six months of this year.

The fall in income means that KMG EP lacks funds of its own other than to keep its reserve replacement from its existing core fields of Emba and Ozen, in the west of Kazakhstan, on track. “Excluding tax-related factors and recognition of fines and penalties, operating expenses in the first six months of 2009 increased by 3.7% in Tenge compared to the same period of 2008, mainly due to an increase in payroll expenses, change in crude oil balance, transportation and energy usage,” the six-months report reads.

But it also makes it clear that exploration and development of new field is beyond KMG EP’s scope. And even then, saving money is on top of the list. “There was a partial offset due to decreases in materials, social infrastructure projects and management fees and sales commissions. In dollar terms, operating expenses, excluding taxes, fines and penalties went down by 13% year on year,” according to the report.

Crude oil prices started the year at a long-time low under $40 per barrel, only to recover to the range between $60 and $70 a barrel in the course of spring. In the first six months of this year, KMG EP’s export sales prices through the CPC pipeline to the Russian port of Novorossysk on the Black Sea averaged $50.08 and through other means of transportation $49.42 per barrel, against $109.51 and $101.85 per barrel in the same period of 2008. Domestic sales prices to refineries dropped from $20.44 to $17.26 per barrel year-on-year in the first six months of 2009. This roughly cut the average sales prices in half, from $83.74 to $43.42 per barrel.

Continuing volatility on global oil markets appears to have prompted KMG EP to buy into forward markets in order to have a steady pile of paper protecting its stocks against shorter-term price fluctuations. Oil companies all over the world have been doing this for a long time, as a result of which trading by proxy has helped them secure the oil between pit and pump in terms of market valuation. Of late, shortage of financing has reduced the role of “outsiders” – mainly hedge funds responsible for reckless speculation in the market place.

“On the 3rd and 20th of August, 2009, the Company has entered into two additional zero-cost collar hedging transactions, for the monthly volume of 1.0 million barrels and 0.5 million barrels, respectively,” the half-year report reads. “The floor price of the recent transaction is US$60 per barrel and the ceiling price of US$85 per barrel of Brent. In the second transaction the floor price of the transaction is US$60 per barrel and the ceiling price of US$86 per barrel of Brent.”

Brent is being traded with a significant premium, usually oscillating between 10 and 15 per cent, on Urals, the general benchmark for a mix between heavy and sour oil from the northern Caspian and lower Volga/Ural province and Siberian Light. Exporting countries tend to be cautiously upbeat over price developments through the current year. Not only KMG EP’s report, but also officials from Kazakhstan’s Big Brother to the north, reflect that stand. “Russian Urals crude differentials weakened slightly on Tuesday as Russia raised forecasts for the 2009 price of its key export blend,” Reuters reported on September 1. “Russian Finance Minister Alexei Kudrin said he now sees Urals oil averaging $57 a barrel this year, up from the $54 forecast previously, and increasing gradually to $60 in 2012.”

(amounts in million Kazakh tenge)

Period Q2’09 Q2’08 H1’09 H1’08
Revenue 123,475.611 193,548.353 206,630.713 337,031.637
Operating expenses (86,400.856) (72,464.771) (149,591.334) (121,777.194)
Profit from operations 37,074.755 121,083.582 57,039.379 215,254.443
Interest income 11,843.824 10,451.668 23,843.516 20,452.017
Interest expense (460.889) (628.548) (970.537) (1,732.044)
Unrealised loss of crude oil derivative instrument (4,491.457)   (4,491.457)  
Foreign exchange (loss) / gain (3,685.204) 128.362 97,886.291 962.372
Share of result of associates and joint ventures (4,080.166) 18,204.437 (5,130.679) 27,254.763
Profit before tax 36,200.863 149,239.501 168,176.513 262,191.551
Income tax expense (15,446.757) (65,183.668) (39,410.822) (114,676.674)
Profit for the period 20,754.106 84,055.833 128,765.691 147,514.877

source: company data

(in US dollar cent)

date 31/12’08 30/06’09 04/09’09
Brent 1-m ICE 4559 6930 6682
Brent spot 4373 6813 6585
WTI 1-m NYMEX 4460 6989 6802
WTI 1-m spot 3927 6984 6797

source: FT/Reuters